Option Investor
Newsletter

Daily Newsletter, Saturday, 5/1/2010

Table of Contents

  1. Leaps Trader Commentary
  2. Portfolio
  3. New Plays
  4. Play Updates
  5. Watch

Leaps Trader Commentary

Market Momentum Slows

by James Brown

Click here to email James Brown

The market just delivered its worst weekly decline in three months but still managed its third monthly gain in a row. Headlines were once again dominated by Greece, economic data, financial reform, and Goldman Sachs. The market's reaction to the various news stories appears to be moving toward a more bearish tone. Earnings news, while generally positive, has lost its momentum. In summary the market appears to be losing steam and the post-earnings season correction may have begun.

The Greece problem refuses to go away. Of course we knew it wasn't over a week ago when Greece officially asked for aid. What should be alarming is how the price of the aid package keeps rising. First there were promises of low-interest loans but that didn't work. Then about three weeks ago EU officials and the IMF hammered down a 45 billion euro aid package. Yet now they're talking about a 130 billion euro aid package.

The major changes in this story have been the sudden reversal in Germany. Most Germans are still against any aid to Greece but in just the last few days German leadership appears to have finally caved into peer pressure to offer a bail out. Further complicating the scene have been a number of downgrades. This past week S&P ratings service downgraded Greek's debt rating to junk, downgraded Portugal two notices and downgraded Spain one notch with negative outlooks for all there.

Debt spreads were rising for most of the PIIGS countries. While many suspect Portugal is next on the list of potential defaults the real worry is Spain, which is a much larger economy. Nouriel Roubini, the somewhat infamous economists who predicted the recent economic downturn, made headlines with his comments that Greece's debt woes are just the "tip of the iceberg".

Evidently Greece has been haggling with EU officials and the IMF on Friday over any aid package. Investors were worried about the headline risk over the weekend since any announcement has been postponed to Sunday.

On a more positive note most of the economic data this past week has been bullish. Same-store sales continue to improve. Consumer confidence numbers improved. The consumer sentiment reading declined but still came in better than expected. The Chicago PMI data improved. The big report was the Q1 GDP number, which came in at +3.2%, which was essentially in line with the +3.3% estimate. More importantly the growth in Q1 saw personal consumption rise to +3.6% compared to estimates for +3.3%. This was the fastest pace in three years. Overall it was a very bullish week for data suggesting the all-important consumer is still hanging in there. This coming week the major event will be the jobs report due out on Friday. Unfortunately the numbers will be distorted by temporary census jobs.

The energy sector suffered some selling this past week. Coal stocks were plagued by disappointing earnings, downgrades, and an FBI probe into the recent coal mine disaster. Meanwhile oil stocks were suffering as the oil rig explosion in the Gulf of Mexico has turned into an oil spill story with daily headlines bombarding the market. Shares of BP sank sharply after the company said the ocean floor well was leaking at 5,000 barrels a day versus original estimates of 1,000 barrels. Shares of Transocean (RIG) have been hammered over the company's exposure to this event. Insurance stock PRE is down for the week after announcing that insured losses could exceed $1 billion. In spite of the sector weakness oil prices look poised to move higher.

One of the biggest stories of the week surfaced on Friday and once again it involves Goldman Sachs (GS). News that the U.S. attorney's office in Manhattan was pursuing a potential criminal probe into the company's CDO and mortgage debt trading sent shivers through the financial sector. The Wall Street Journal pointed out that in the last 200 years not one company has ever survived criminal charges. It was two weeks ago that the SEC shocked the market with a civil lawsuit against GS claiming fraud in the company's CDO dealings. Currently it is widely accepted that any criminal case would be extremely difficult to pursue due to the complexity of the matter and the challenge to prove beyond a reasonable doubt for prosecutors. Unfortunately that did not stop shares of GS from losing more than 9% on Friday and sinking to a new low for 2010.

Technically the market looks tired. I have been suggesting that stocks would see a post-earnings sell-off in the second half of April. The action last week helped support that the correction theory. You could argue that the S&P 500 index and the NASDAQ composite have both formed bearish head-and-shoulders patterns. If the S&P 500 breaks down under the 1180 level the H&S pattern would forecast a drop toward 1140 although personally I would expect to see support closer to 1150, which was prior resistance. If the NASDAQ breaks down under the 2450 level the pattern would portend a correction toward the 2365 area although the 2400 level and the 50-dma could offer some support.

Technicals offer clues on what to expect but this remains a news-driven market. Investors are concerned that this Goldman Sachs story is going to add fuel to the financial reform fire. Meanwhile traders are nervous about the rising risk of sovereign debt default in Europe. It could just be the case of traders looking for an excuse to take profits. You've heard it before but there are investors who do practice the sell-in-May theory to market timing. I've also read recent claims that hedge funds have been lowering their exposure to stocks. Don't get me wrong. I'm not suggesting the rally is over but we've been waiting for a normal correction in this trend higher. One of the biggest clues that the market could be forming a top has been volume. Trading volumes have been elevated and the combination of big volume and increased volatility is usually a good sign of a turning point at market tops and market bottoms.

It is worth noting that bears could argue that the rally is running out of steam at a major Fibonacci number (near 1220 on the S&P 500) and that suggests the entire move off the 2009 lows is nothing more than a bear-market bounce. I'm not suggesting the rally is over just yet. Instead traders can look for a 5%-10% correction. If the S&P pulled back 5% from the 1220 level we would see a dip toward the 1160 area. A 10% correction would produce a pull back toward the 1100 level (and the 200-dma) for the S&P 500. The last correction that began in January lasted about four weeks. Don't be surprised if this pull back lasts several weeks.

The good news here is that the market pull back we've been patiently waiting for appears to have started. Over the next few weeks we will be looking for an entry point to launch new bullish positions. Take your time and let the market come to you.

Chart of the S&P 500 Index:

Chart of the NASDAQ Composite Index:

LONGER TERM OUTLOOK

Previous Comments on my Long-Term Outlook:

My long-term outlook has not changed. I still expect the economy to see a double-dip, "W"-shaped rebound with the second dip in 2010 (some analysts are predicting it will not show up until 2011). Lousy consumer spending, rising foreclosures, and lagging job growth will be the main culprits. Several weeks ago there were some comments out of the U.S. Treasury concerning foreclosures. The Obama administration's HAMP loan modification program can only help a certain number of homeowners and one official said that even if the HAMP program was a total success we should still expect millions of new foreclosures. This only reinforces my own belief that we will see another tidal wave of foreclosed homes in 2010 and 2011. Some analysts are forecasting upwards of six million foreclosures in the next three years. What is that going to do to consumer confidence and consumer spending? It's not going to help! You can review my long-term outlook here. It's the second half our my "Two Months Left" commentary.

~ James Brown


Portfolio

Portfolio Update

by James Brown

Click here to email James Brown


Current Portfolio


Portfolio Comments:

The market is looking a little frothy here and it could be another sign stocks are nearing a short-term top. Our portfolio is seeing some changes. BWA hit our first target at $44.50. TBT, the inverse 2x ETF on the bond market, hit our stop loss. Meanwhile shares of APA made a brief appearance on the play list before getting stopped out.

We also had CLR and WLL graduate from the watch list to our play list and both look strong today.

BWA is the only play with a new stop loss.

Disclaimer: At any given time the author may have positions in any or all of any companies mentioned in the Leaps Newsletter.

--Position Summary Table--
Table lists Directional CALL or PUT/LEAPS only.
Insurance puts, if applicable, are not shown.

Red symbol/name represents a dropped play this week.




New Plays

Technicals Merge With Headline Risk

by James Brown

Click here to email James Brown


Signs of a Market Top


Editor's Note:

(...Intro music for Mortal Combat, actors ready? ...and "action")

"It has begun!"

Forgive me. Mortal Combat was a terrible movie but after weeks of suggesting the markets would roll over in the second half of April it's nice to see the market cooperate with us. Negative headlines from Greece to Goldman Sachs to the oil spill in the Gulf have ganged up on the markets and put a halt on the upward momentum. The increase in volatility combined with higher trading volumes is a good sign the market could be forming a top. Add to that the bearish head-and-shoulders pattern and it certainly seems like the long awaited market correction may have finally begun.

Naturally with stocks about to roll over this is not the place to launch new long-term bullish positions. We are adding new candidates to the watch list and I've updated a few triggers on the watch list to prepare for a market pull back. The last correction lasted about four weeks. This one will probably take a few weeks. We have time to sift through the market, identify the winners we want to buy on weakness, and wait for our entry point.



Play Updates

BWA Hits Our Target

by James Brown

Click here to email James Brown

Editor's Note:

It looks like the market top has finally arrived. Readers may want to consider taking some money off the table. The correction could take weeks.


Closed Plays


APA graduated from our watch list to our play list and immediately reversed lower. Shares eventually hit our stop loss. The TBT saw a sharp move lower on bond strength and hit our stop loss.


Play Updates


Arch Coal Inc. - ACI - close: 27.00 change: -0.46

Take some money off the table. It has been a difficult week for coal stocks to maintain their gains with the sector struggling with big declines in shares of Massey Energy (MEE), the company that suffered the big coal mine disaster. News on Friday that the FBI might be investigating MEE for potential criminal charges sent MEE down 11%. Meanwhile shares of ACI have been hovering sideways in the $27-28 zone. The longer-term trend for ACI still appears to be up but shares are struggling with resistance near the $28 level. This past week there has been some bullish speculation that coal prices could rise sharply by the end of 2010, which would be positive for the sector. Unfortunately short-term ACI looks like it's ready to pull back toward the $25-24 zone.

I am suggesting we go ahead and sell half our position. Better to take some money off the table now with the major market averages looking vulnerable.

I'm not suggesting new bullish positions at this time. Our final target for the LEAP trade is $34.75.

May 14th, 2009 - entry price on ACI @ 16.00, option @ 2.40
symbol: OSE-AF, 2011 JAN $30 LEAP call - current bid/ask $3.00/3.20
-stop loss on ACI @ 21.95

05/01/10 Sell Half, ACI @ $27.00, option @ 3.00 (+25%)

--2nd Entry--
Feb 13th, 2010 - entry price on ACI @ 21.65, option @ 4.40
symbol: YEP1221A25 2012 JAN $25 LEAP call - current bid/ask $7.60/7.90
-stop loss on ACI @ 21.95

05/01/10 Sell Half, ACI @ $27.00, option @ 7.60 (+72%)

Chart of ACI:


Berkshire Hathaway Inc. - BRK.B - $77.00 -1.09

This is a big weekend for Berkshire. The company holds their annual meeting on May 1st. Attendance this year is expected to be a record in the 35,000 to 40,000 investors traveling to Omaha, Nebraska to listen to Mr. Buffett talk about the company's $26 billion acquisition of Burlington Northern (BNI) and answer questions regarding his $5 billion investment in Goldman Sachs, which was looking very good until about two weeks ago.

As far as the stock price of BRK.B shares have continued to correct as we expected they would. The stock should find support near $75 and near $70. I have been suggesting readers wait for a dip into the $73-70 zone before considering new bullish positions. More conservative traders can wait to buy the bounce instead of buying the dip.

Our first target is $90.00. Our second target is $99.50

Feb 6th, 2010 - entry price on BRK.B @ 73.57, option @ 4.80
symbol: 2011 JAN $80 XPB1122A80 LEAP call - current bid/ask $5.30/5.60
-stop loss on BRK.B @ 69.00

Feb 6th, 2010 - entry price on BRK.B @ 73.57, option @ 6.50
symbol: 2012 JAN $85 WDW1221A85 LEAP call - current bid/ask $7.40/8.10
-stop loss on BRK.B @ 69.00

Chart of BRK.B:


BorgWarner Inc. - BWA - close: 43.34 change: -0.73

Target achieved! BWA reported earnings on Thursday morning (April 29th). Not only did BWA beat estimates by 24 cents with a profit of 65 cents per share but management raised their 2010 guidance. Q1 revenues also beat expectations. The stock reacted by gapping open higher on Thursday morning at $44.07 and hitting $44.55 intraday. Our first target to take profits was at $44.50. The option traded at $7.63.

Short-term BWA looks a little overbought and I would expect a correction back toward $40.00. Let's see the stock reaffirm support near $40 before considering new bullish positions. I am raising our stop loss to $34.90. Our second and final target is still $49.75.

Feb 17th, 2010 - entry price on BWA @ 37.55, option @ 3.90
symbol: ZWY1122A40 2011 JAN $40 LEAP call - current bid/ask $6.60/7.70
-stop loss on BWA @ 34.90 *new*

04/29/10 1st Target Hit, BWA @ 44.50, option @ $7.63 (+95%)

Chart of BWA:


Celgene Corp. - CELG - close: 61.99 change: +0.37

CELG drifted sideways into its earnings report. The company announced on April 29th before the opening bell and beat estimates by 3 cents a share. Revenues were much higher than expected and management raised their 2010 guidance. The stock reacted with a gap open higher and a surge toward the $64 level. The news also garnered some bullish analysts comments. The action this past week looks like a bullish breakout/reversal from a five-week correction. Yet short-term I would expect a dip back toward the $60-58 zone again. I would wait for the pull back again and then consider buying the next rebound higher. Keep in mind I am cautious about opening new positions with the major indices looking ready to finally correct lower.

Our long-term target is the $74.00 level. I have been suggesting the 2011 Jan. $65 calls but readers may want to buy the 2012 calls.

FYI: A few weeks ago CELG was number 5 on Morningstar's top ten list of potential takeout (acquisition) targets.

Mar 1st, 2010 - entry price on CELG @ 60.75, option @ 5.40
symbol: VCS1122A65 2011 JAN $65 LEAP call - current bid/ask $5.50/5.70
-stop loss on CELG @ 54.75

Chart of CELG:


Continental Resources - CLR - close: 49.16 change: +1.30

CLR was a new watch list candidate from last week. Shares performed perfectly with dip toward $45.00 and rebound higher. Our plan was to launch small positions on a dip to $45.25. The stock has been unaffected by any weakness in the energy sector. While the stock is nearing potential round-number resistance at $50.00 shares did close at new 52-week highs. The company is due to report earnings on May 5th after the closing bell. Wall Street is looking for a profit of 35 cents a share. The company has been beating the estimate the last three quarters so investors are probably expecting another beat. If they fail to meet expectations we can expect some short-term profit taking. The $45.00 level should remain short-term support. Our long-term target is $59.00.

FYI: Cautious traders may want to consider short-term protective puts or taking some quick profits ahead of the earnings report. The choice depends on how much risk you're willing to take.

Half Position (or smaller)

Apr 28, 2010 - entry price on CLR @ 45.25, option @ 4.40
symbol: CLR1018L50 2010 DEC $50 call - current bid/ask $6.20/6.50
-stop loss on CLR @ 39.75

Chart of CLR:


Fortune Brands - FO - close: 52.42 change: -1.58

Warning! The action in FO this past week looks like a top or bearish reversal pattern. The company pre-announced better than expected earnings on April 27th and the stock spiked to $55.68. That proved to be the high for the week. The company reported earnings on April 29th and the results were better than expected on both profits and revenues. Management narrowed their prior guidance to the upper end of the range. Investors have taken a sell-the-news approach and FO is correcting.

A negative reaction to bullish earnings news is certainly a warning sign. On a short-term basis the $50.00 level should be support. If the $50 level breaks we're looking at possible support near $48 and $46. I am not suggesting new bullish positions at this time. Let's wait and see where FO finds support and look for a rebound.

More cautious investors will want to seriously consider selling the rest of their position right now with the option double what we started at. You could always jump back in on the next bounce.

We have already chosen to sell half our position near $52. Our long-term (final) target is $59.75.

Mar. 12th, 2009 - entry price on FO @ 47.55, option @ $2.20
symbol: FO1018I50 SEP 2010 $50 call - current bid/ask $4.40/ 4.80
-stop loss on FO @ 45.75

04/17/10 Sell Half - FO @ $52.00, option @ $4.30 (+95%)

Chart of FO:


Forest Oil Corp. - FST - close: 29.30 change: +0.53

It has been a rough week for the energy sector as the market reacts to the oil spill in the Gulf of Mexico. Both the OIX oil index and OSX oil services index are down for the week. FST also suffered a pull back but overall the stock is holding up pretty well. Shares were downgraded on April 28th but traders actually bought the intraday dip. Traders have continued to buy dips near the short-term rising 10-dma. FST acts like it wants to rally higher but that will depend on earnings.

FST is due to report earnings on Monday, May 3rd after the closing bell. Estimates are currently for a profit of 47 cents a share. I am not suggesting new positions ahead of the earnings report. If FST does see any profit taking we can look for short-term support in the $26-25 zone.

Our long-term target is $37.50.

Oct 15th, 2009 - entry price on FST @ 23.85, option @ 7.40
symbol: OJG-AD, 2011 $20 LEAP call - current bid/ask $ 9.80/10.70
-stop loss on FST @ 23.45

Chart of FST:


McDermott Intl. - MDR - close: 27.41 change: -0.87

Caution! The upward momentum in MDR has stalled. Shares of MDR failed twice near the $29.00 level last week. This small double top pattern is bearish. News that one of MDR's subsidiaries has won a $90 million contract in Michigan on Friday was not enough to stop shares from losing 3% during the market sell-off. I would not be surprised to see MDR correct back toward the $25.00 level. We can probably expect the stock to churn sideways to down into its earnings report on May 11th.

I would wait for a convincing bounce in the $24-26 zone before considering new positions and readers may want to wait until after we see the market's reaction to earnings before considering new positions.

Our long-term target is $37.50. Investors may want to consider 2012 LEAPS and aim higher.

- Half position size -
Apr 14th, 2010 - entry price on MDR @ 28.25, option @ 2.95
symbol: 2011 JAN $30 LEAP call - current bid/ask $ 2.40/ 2.65
-stop loss on MDR @ 23.90

Chart of MDR:


Manitowoc Inc. - MTW - close: 14.01 change: -0.36

Ouch! It was a painful week for MTW. Shares spike to a new 52-week high last Monday ($16.43) but couldn't hold on to it. The earnings report on April 27th was a disappointment. MTW's losses were worse than expected and revenues missed estimates. Shares plunged from $16 to almost $13.50 during Tuesday and Wednesday's pull back. The oversold bounce late in the week is already fading. More conservative traders will want to seriously consider a complete exit right here and now. We have already taken profits once. Consider hitting the eject button. I am not suggesting new bullish positions at this time. I am expecting the correction to continue toward the $12.50-12.00 zone.

Our final target is $17.50. I am not suggesting new bullish positions at this time.

Oct 30th, 2009 - entry price on MTW @ 9.10, option @ 2.61
symbol: VMT-AB, 2011 JAN $10 call - current bid/ask $4.60/4.90
-stop loss on MWT @ 11.75

01/18/10 Sell Half! MTW @ 13.70, option at $4.80 bid (+83.9%)

- or -

Oct. 30th 2009 - entry price on MTW (the stock) @ 9.10
- stop loss on MTW @ 11.75

01/18/10 Sell Half! MTW @ 13.70 (+50.5%)

Chart of MTW:


PEPSICO Inc. - PEP - close: 65.22 change: +0.02

We have been looking for PEP to correct into the $64-62 zone and shares slipped to $63.60 last week before bouncing. Unfortunately the oversold bounce stalled on Friday near short-term resistance at $66 and its 30-dma. Thus I don't think the correction is over yet. This time I'd focus on the $63-62 area before expecting a bounce. The larger trend is still up but I'm not suggesting new bullish positions at this time.

Our (adjusted) final target is $72.25. FYI: In other news PEP said their annual shareholders meeting will be held on May 5th.

July 7th, 2009 - entry price on PEP @ 57.25, option @ $4.50(estimate)
symbol: VP-AL, 2011 $60.00 LEAP call - current bid/ask $6.85/7.05
-stop loss on PEP at $59.40

03/27/10 SELL HALF: PEP $ 66.59, Option @ $8.00 (+77.7%)

Chart of PEP:


Potash Corp. - POT - close: $110.50 change: -0.11

POT spent the week bouncing around the $106-112 zone as investors waited for the earnings report due out on April 29th. The results were better than expected with a profit of $1.47 a share compared to estimates of $1.32. Revenues also beat expectations yet management lowered their Q2 and 2010 guidance. The conference call seemed to be full of bullish headlines for the sector yet POT said it will start shutting down production in spite of what appears to be rising demand both here and abroad. Market reaction was mild considering the lowered guidance.

Technically it looks like POT could be building a new base to rally from in the $106-112 zone but I would hesitate to launch new positions given the broader market's weakness this past week. A close over $117 in POT might change my mind.

We sold half our position near $125. Our final target is $160.00.

Jan. 28th, 2010 - entry price on POT @ 101.00, option @ 11.75
symbol: VPT-AB, 2011 LEAP $110 call - current bid/ask $15.05/15.40
-stop loss on POT @ 98.50

SELL HALF (03/13/10) option @ $26.35 bid (+124%)

Chart of ORCL:


PartnerRe Ltd. - PRE - close: 77.58 change: -1.11

Oops! The oil rig blast in the Gulf of Mexico has turned into daily headlines regarding the oil spill and what could end up being the worst natural disaster in the U.S. It turns out that PRE has exposure to the event and recently announced that losses could exceed $1 billion. This explains the sudden, sharp decline in the stock price. We've talked about a pull back toward support in the $76-75 zone before and that's exactly where PRE bounced on Friday. Yet I would hesitate to open new positions since the oil spill is still an ongoing disaster. Due to this event more conservative traders will want to seriously consider an early exit right now to cut their losses early. PRE has already announced that their earnings next quarter will be affected by this event. In the meantime the company is due to report earnings on May 6th after the closing bell. Wall Street expects a loss of 77 cents a share.

Our first target is $84.90. I am adjusting our secondary target to $89.50.

Feb. 13th, 2010 - entry price on PRE @ 76.28, option @ 2.70
symbol: PRE1021H80, 2010 AUG $80 call - current bid/ask $2.20/2.50
-stop loss on PRE @ 74.75

Chart of PRE:


Titanium Metals - TIE - close: 15.42 change: -0.64

Warning! Shares of TIE are forecasting a move lower. Momentum stalled under $17.50 and now we're seeing traders sell into strength. TIE looks like it's about to breakdown under support in the $15.50-15.25 zone and when it does I would expect a dip toward the $14.00-13.00 area. If you do not want to endure that sort of move then I suggest you exit now. Further complicating matters is the company's earnings report. I still can't find a confirmed date but TIE is due to announce earnings sometime in the May 3rd-May 13th range. Analysts estimate a profit of 3 cents a share.

Aggressive traders may want to consider buying short-term puts to profit from the decline but I normally try to avoid holding short-term positions over an earnings announcement and not having an earnings date makes that a challenge.

Two weeks ago we closed the 2011 January $15 call LEAP. We still have the 2012 January $15 call LEAP. I am not suggesting new positions at this time. Our final, long-term target is $19.75.

Feb. 20th, 2010 - entry price on TIE @ 12.06, option @ 2.60
symbol: WWN1221A15, 2012 JAN $15 LEAP call - current bid/ask $3.90/4.30
-stop loss on TIE @ 12.90

03/27/10 SELL HALF: TIE @ 16.21, option @ 4.50 (+73%)

Chart of TIE:


iShares 20+Yr Bond ETF - TLT - close: 92.13 change: +1.05

Deteriorating conditions in the European debt market seems to be driving more money into U.S. bonds. Bonds have been rising and the TLT broke through one of its trendlines of lower highs. Shares of this ETF are nearing resistance in the $92.50 region and its 200-dma. More conservative traders may want to go ahead and exit early now to limit their losses. I am not suggesting new positions at this time but nimble traders can watch for a failed rally and bearish reversal near resistance as a possible entry point. Our first, long-term target is $81.00.

FYI: The TLT is an exchange traded fund that tries to mimic the performance of the Barclays Capital U.S. 20+Year Treasury Bond Index.

Jan. 09th, 2010 - entry price on TLT @ 89.29, option @ 6.40
symbol: VJL-MG, JAN 2011 $85 LEAP put - current bid/ask $3.00/3.20
-stop loss on TLT @ 93.15

Jan. 09th, 2010 - entry price on TLT @ 89.29, option @ 8.90
symbol: YLI-MB, JAN 2012 $80 LEAP put - current bid/ask $5.50/6.25
-stop loss on TLT @ 93.15

Chart of TLT


UnitedHealth Group Inc. - UNH - close: 30.31 change: -0.99

A bullish earnings report from rival Aetna on Thursday was not enough to keep the rally in healthcare stocks alive. Traders sold the move in UNH as the market's Friday decline accelerated. Thus far support near $30.00 and its rising 200-dma is holding. However, I am losing faith that this level is going to hold. The HMO healthcare sector index has much further to fall before it finds similar support. Plus the S&P 500 looks like it is just beginning to correct. More conservative investors will want to strongly consider an early exit right now. Odds are growing that we'll get stopped out in the next week or two.

The plan was to use small positions to limit our risk. Our long-term target is $42.50.

Dec 16th, 2009 - entry price on UNH @ 31.55, option @ 3.80
symbol: VUH-AG, 2011 JAN $35 LEAP call - current bid/ask $1.91/1.99
-stop loss on UNH @ 28.95

Chart of UNH:


Visa Inc. - V - close: 90.23 change: -2.59

Last Monday morning's gap open near $97.50 proved to be a high for the week. Shares quickly reversed lower as investors started selling Visa ahead of its earnings report. The company announced on April 28th and the results were good. A profit of $0.96 a share was 5 cents better than expected. Revenues surged almost 19% and came in better than expected. Management reaffirmed their 20% earnings growth and raised their revenue estimates. What did the market do? They sold the news. The stock is off more than 6% for the week and is has broken down under its 50-dma. Shares did manage to hold support near prior resistance at the $90.00 level. Will this area hold? Probably not if the wider market breaks down. I am expecting a pull back into the $87.50-85.00 zone. Conservative investors could exit now and avoid or minimize any losses with the option still near $4.60. More aggressive traders may want to widen their stop loss a little. I believe that if Visa closes under $90.00 our risk of getting stopped out jumps significantly.

I am not suggesting new positions at this time. If we do end up getting stopped out we'll watch Visa for new support in the $80-75 area. Our long-term target is the $109 mark.

Mar 9th, 2009 - entry price on V @ 91.00, option @ 4.60
symbol: VSK1122A100 JAN 2011 $100 LEAP call - current bid/ask $4.60/4.75
-stop loss on V @ 84.90

Chart of V:


Whiting Petroleum - WLL - close: 90.33 change: +0.87

We were lucky with WLL. The stock was a new watch list candidate and shares dipped low enough to hit our trigger at $83.50 just before surging to new highs. We were triggered on April 27th. The company reported earnings on April 28th and bested estimates by 5 cents. Revenues surged more than 110% from a year ago and also beat estimates. The sideways trading over the last four weeks now looks like a base of support in case WLL see any profit taking. Our long-term target is $99.50. More aggressive traders could aim higher. Remember, this was an aggressive entry point and we wanted to keep positions small to limit our risk (half a position).

Half position

Apr 27, 2010 - entry price on WLL @ 83.50, option @ 7.50
symbol: OVK1122A90 JAN 2011 $90 LEAP call - current bid/ask $11.30/11.90
-stop loss on WLL @ 74.75

Chart of WLL:


Wal-Mart Stores Inc. - WMT - close: 53.64 change: -0.06

The slow-moving shares of WMT continue to do just that - move slowly. The trend over the past few weeks has been down and last week was no exception. Traders were selling into strength near the 100-dma. I have been suggesting that readers should focus on the $52.00 as a potential entry point. I'd adjust that to focus on the 200-dma near $52.50 first. Just remember that this is a very long-term trade for us. We don't have to buy the dips. You can wait to buy a bounce (which could be weeks away).

Our long-term target is the $63.00 level. Since WMT does not move very fast readers may want to supplement their position by turning it into a calendar spread or a diagonal spread to enhance their gains.

Mar 7th, 2009 - entry price on WMT @ 54.14, option @ 4.60
symbol: WWT1221A55 JAN 2012 $55 LEAP call - current bid/ask $4.65/4.85
-stop loss on WMT @ 49.45

Chart of WMT


CLOSED Plays

APA - Apache Corp. - close $101.76 change: -1.16

It was a volatile week for APA and unfortunately we were caught up in it. Shares spiked to $111.00 on Monday, which was enough to hit our trigger at $110.50. We knew this was an aggressive entry point so the plan was to initiate small positions. Unfortunately the oil sector turned south as investors reacted to the daily headlines of the oil rig fire and oil spill spreading across the Gulf of Mexico. To complete this perfect storm APA reported earnings on April 29th and missed estimates by 14 cents. The stock reacted to earnings on Friday morning with an intraday spike down to $96.06. That's a $15 range in a week where we were triggered and stopped out. Of course our stop was actually hit on Thursday at $102.45.

Triggered on 04/26/10 at $110.50, option at $9.30

Stopped out on 04/29/10 at $102.45, option at $7.76 (-16.5%)

Chart of APA:


UltraShort 20+ Year Treasury Bond ProShares - TBT - cls: 45.19 chg: -1.08

The TBT is a double-inverse ETF on the U.S. bond market so the moves this past week were exaggerated enough to hit our stop loss. Shares broke support and hit our stop at $45.90 on April 27th. This was the same day stocks sank sharply and money moved into the perceived safety of bonds.

Long-term my bias on bonds has not changed. The pace of U.S. debt and its deficit is unsustainable and eventually the bond market is going to react unless this country does something serious about tackling this problem.

FYI: The TBT is an exchange traded fund (ETF) that tries to deliver twice the inverse performance of the Barclays Capital 20+ Year U.S. Treasury index.

Jan. 09th, 2010 - entry price on TBT @ 50.63, option @ 4.90
symbol: XRJ-AC, JAN 2011 $55 LEAP call - current bid/ask $1.60/1.84
-stop loss on TBT @ 45.90

Stopped out 04/27/10, TBT @ 45.90, option @ $1.80 (-63%)

Jan. 09th, 2010 - entry price on TBT @ 50.63, option @ 7.90
symbol: YHT-AH, JAN 2012 $60 LEAP call - current bid/ask $4.20/6.60
-stop loss on TBT @ 45.90

Stopped out 04/27/10, TBT @ 45.90, option @ $4.10 (-48%)

Chart of TBT



Watch

Software & Industrial Goods

by James Brown

Click here to email James Brown

Editor's Note:

The market's last correction lasted about four weeks. It looks like stocks could be launching into the next correction lower. Don't be surprised if it lasts a few weeks. We'll be ready to pounce on an entry point with this watch list.


New Watch List Entries

CRM - Salesforce.com

FLS - Flowserve Corp.


Active Watch List Candidates

CIR - CIRCOR Intl.

CRS - Carpenter Technology

DE - Deere & Co.

EMC - EMC Corp.

IMN - Imation Corp.

LMT - Lockheed Martin

MICC - Millicom Intl.

RT - Ruby Tuesday, Inc.

WLT - Walter Energy Inc.


Dropped Watch List Entries

APA, CLR and WLL all graduated to the play list last week. SAFM and TRMB have both been temporarily removed from the watch list.


New Watch List Candidates:

Salesforce.com - CRM - close: 85.60 change: -2.54

It's been a while since we traded CRM. That stock has been an exceptional performer over the last three months. The breakout past resistance at $75.00 was a major milestone for the stock. I suspect the uptrend will continue. The recent GDP data showed businesses were spending more on equipment and software and that might translate into a bullish environment for CRM.

Short-term the stock is overbought and with the market looking vulnerable I would expect a correction in CRM. Broken resistance near $75.00 should be decent support. I'm suggesting a trigger to buy calls at $75.50. If triggered we'll use a stop loss at $67.00. Our long-term target is $99.00.

Company Info:
Salesforce.com is the enterprise cloud computing company. Based on salesforce.com’s real-time, multitenant architecture, the company’s platform and CRM applications (http://www.salesforce.com/crm) have revolutionized the way companies collaborate and communicate with their customers. Salesforce.com offers the fastest path to customer success with cloud computing. As of January 31, 2010, salesforce.com manages customer information for approximately 72,500 customers. (source: company press release or website)

Buy-the-Dip trigger: $75.50

BUY the 2011 January $80 calls (CRM 11A80.00)
- or -
BUY the 2012 January $90 calls (CRM 12A90.00)

Chart of CRM:


Flowserve - FLS - close: 114.58 change: -4.33

Plenty of countries are spending their stimulus money on infrastructure, energy and water projects. That should be good news for the likes of FLS. The stock has been flirting with 52-week highs for most of April but I suspect shares are ready to correct lower. That correction may occur after the company reports earnings on May 5th (after the closing bell). It could take two or three weeks but the plan is to open bullish positions on a dip near $100. I am suggesting a trigger to open plays at $102.00. If triggered we'll use a stop loss at $92.40. Our long-term target is $135.00.

Company Info:
Flowserve Corp. is one of the world’s leading providers of fluid motion and control products and services. Operating in more than 55 countries, the company produces engineered and industrial pumps, seals and valves, as well as a range of related flow management services. (source: company press release or website)

Buy-the-Dip trigger: $102.00

BUY the 2011 January $110 calls (FLS 11A110.00)
- or -
BUY the 2012 January $120 calls (FLS 12A120.00)

Chart of FLS:


Active Watch List Candidates:

CIRCOR Intl. - CIR - close: 34.46 change: -0.66

It appears the correction in CIR has begun. The stock spiked to $36.33 on Monday and is already off 5%. We are expecting a correction back toward support near $30.00. Stocks tend to drop faster than they climb so CIR could hit our trigger in the next two or three weeks. Keep in mind that CIR is also due to report earnings on May 10th. Readers may want to wait until after we see the reaction to earnings before initiating positions even if the stock does hit our trigger beforehand.

Right now our trigger to open positions is at $30.50. If triggered we'll use a stop at $27.45. Our long-term target is the $40 area. FYI: The P&F chart is pointing to a $47 target.

NOTE: I would only start with half a position. We want to keep our exposure limited.

Buy-the-Dip trigger: $30.50

BUY the 2010 NOV $35 calls (CIR 10K35.00)

Chart of CIR:


Carpenter Technology - CRS - close: $39.27 change -1.21

CRS is another high-flying momentum stock that is finally starting to roll over. After weeks and weeks of gains it looks like the correction may have finally begun. CRS reported earnings on April 27th. The results were better than expected but it appears the numbers were already baked in and traders sold the news. CRS certainly looks short-term vulnerable here. I am expecting a correction into the $33-30 zone. Currently our trigger to open bullish positions is at $33.00. I am adjusting our stop loss to $28.90. Our long-term target is $44.75. My time frame for CRS to hit our trigger is the next two or three weeks.

Buy-the-Dip trigger: $33.00

BUY the 2010 December $40 calls (CRS 10L40.00)

Chart of CRS:


DE - Deere & Co. - close: 59.82 change: -0.79

DE is another high-profile name that appears to be rolling over. Shares spike to a new high last Monday but couldn't hold it. The move looks like a bull trap and on the weekly chart DE has produced a bearish engulfing candlestick (reversal) pattern, but it needs to see confirmation. I am expecting a correction back toward the rising 200-dma. Currently our plan is to open bullish positions on a dip at $52.50. My time frame is the next two or three weeks before DE hits our trigger. If triggered we'll use a stop loss at $47.90. Our first target is $69.75.

Buy-the-Dip trigger: $52.50

BUY the 2011 January $55 call (DE 11A55.00)
- or -
BUY the 2012 January $60 call (DE 12A60.00)

Chart of DE:


EMC Corp. - EMC - close: 19.01 change: -0.62

Tech stocks were hit hard on Friday and EMC gave up more than 3%. The stock lost about 5% for the week. Shares closed at short-term support near $19.00. I am expecting a 10% correction, which is why our trigger to open positions is at $18.25. More nimble traders may want to try and jump in on a dip closer to the $18.00-17.50 zone. The simple 200-dma has risen to $17.17 and should offer some support. Therefore we'll raise the stop loss to $16.75.

Buy-the-Dip trigger: $18.25

BUY the 2011 January $20.00 LEAP CALL (EMC 11A17.50)
- or -
BUY the 2012 January $20.00 LEAP call (EMC 12A20.00)

Chart of EMC:


Imation Corp. - IMN - close: 10.84 change: -0.73

Ouch! Investors were very unhappy with the company's earnings report on April 27th. IMN missed estimates by 12 cents and the stock was hammered. Traders initially bought the dip at its 50-dma but the selling resumed on Friday. We have been expecting a big correction in IMN but the pace of the pull back is pretty steep. I am moving our trigger to open bullish positions down to $10.00. More conservative traders could focus on what appears to be support near the $9.50 level.

I am suggesting we buy the stock but options are available. If triggered our first target is $12.25. Our second target is $14.25. We'll use a stop loss at $9.24.

Buy-the-Dip trigger: $10.00 *new*

Buy the IMN stock at $10.00

-or-

BUY the 2010 October $10.00 call (IMN 10J10.00) *adjusted*

Chart of IMN:


Lockheed Martin - LMT - close: 84.89 change: -1.48

LMT dipped to $83.89 last week before traders jumped in and pushed it back toward resistance near $87.00. Unfortunately the resistance held and momentum indicators are suggesting LMT could be ready to roll over. I am taking a more conservative approach to new positions in LMT. Our new trigger to buy calls is at $80.50. More nimble traders could try and jump in around the $79-78 zone. If we are triggered at $80.50 we'll use a stop loss at $74.75. Our first target is $99.00. Our second, longer-term target is $109.00.

FYI: I am suggesting if we do get triggered that readers only launch a half position (or smaller) since the market looks vulnerable.

Buy-the-Dip trigger: $80.50 *adjusted*

Half position or smaller!

BUY the 2011 January $85 calls (LMT 11A85.00) *updated*
-or-
BUY the 2012 January $90 calls (LMT 12A90.00)

Chart of LMT:


Millicom Intl. - MICC - close: 88.28 change: +0.06

Traders bought the dip again but it looks like the correction may have begun. MICC has produced a new relative low and a new lower high. Friday's bounce stalled at $90.00. I'm still expecting a correction toward $80.00 and we're adjusting our trigger to open positions to $80.00. Our stop loss, if triggered, will be $74.40. Our long-term target is $99.50 and the $109.00 levels.

Buy-the-Dip trigger: $80.00

BUY the 2011 January LEAP $90.00 calls (MICC 11A90.00)

Chart of MICC:


Ruby Tuesday Inc. - RT - close: $11.19 change: -0.59

The tug-of-war continues but the bulls are starting to look tired. RT is losing steam. I'm expecting a big correction in RT. We want to open positions at $9.50. More nimble or conservative traders could wait and try to jump in on a dip near $9.00 if RT provides one. October options are the longest ones available so I prefer buying the stock over an option. It could take another two or three weeks before RT finally hits our trigger. If triggered we'll use a stop at $8.45. Our first target is $12.00. Our longer-term target is $14.75.

Buy-the-Dip trigger: $9.50

BUY the stock at $9.50

- or -

BUY the 2010 October $10.00 calls (RT 10J10.00)

Chart of RT:


Sanderson Farms Inc. - SAFM - close: 56.67 change: -1.07

I am temporarily removing SAFM from the watch list. I still believe shares offer an entry point on a dip back toward the $50-47.50 zone but it could take a while before they correct that deep. I'll be watching it and we'll probably put it back on the watch list as it gets closer to support near $50.00.


Trimble Navigation - TRMB - close: 32.70 change: +0.91

The profit taking in the tech sector and semiconductor sector has had no affect on TRMB. Shares surged to new 52-week highs thanks to a better than expected earnings report and a new broker price target. TRMB is still very overbought and we don't want to chase it here. I am temporarily removing it from our watch list. I still believe TRMB offers potential but it could take weeks before shares provided a decent entry point for a longer-term position. Right now I would watch for a correction toward the $28-27 area.


WLT - Walter Energy Inc. close: $80.81 change: -4.82

We were expecting a sharp correction in WLT but the velocity of the move has been faster than expected. The combination of downgrades in the coal sector, news that the FBI was looking into the recent coal mine disaster was already depressing stocks in the industry. Add to that a disappointing earnings report from WLT and shares plunged toward support near $80 and its 100-dma. I now suspect that WLT could dip toward its rising 200-dma.

I am now suggesting we adjust our trigger to launch bullish positions down to $73.00. If triggered we'll use a stop loss at $64.50. Our first target is $99.00.
FYI: WLT can be a volatile stock. Readers may want to keep their position size small when initiating a position.

Buy-the-Dip trigger: $73.00 *adjusted

BUY the 2011 January $80 calls (WLT 11A80.00) *adjusted
- or -
BUY the 2012 January $90 calls (WLT 12A90.00)

Chart of WLT: